401k: When You Should Not Do A Rollover

You might have seen the Suze Orman TD Ameritrade advertisements lately discussing 30 free trades for one year. If you go to the TD Ameritrade website Suze has prepared some helpful videos.  One in particular, the video called “Keeping Your 401k” under the Retirement section, probably has the most important information for someone nearing retirement.

Did you know that it is not always in your best interest to move your 401k (or 403b) retirement account over to an IRA?

This may sound counter intuitive, especially after hearing about 401k rollovers for years. In fact, most times it is considered a bad idea not to rollover your 401k because it can go unmanaged, or you may forget about the funds.

However, if you are 55 or older in the year you leave service, regardless of the reason, you are able to access funds in your 401k without incurring a 10 percent federal tax penalty. Yes, you will still have to pay income tax on the money you withdrawal but being able to avoid the 10 percent penalty is a very big deal.

For example, maybe you are 57 years old and have recently been let go due to downsizing. If you need money to make ends meet, you can take the proper amount of funds from your 401k without penalty and without having to pay the money back. However, if you rollover your 401k account into an IRA you will not be able to access the money without a 10 percent penalty until you reach 59.5 or older.

Another key is you have be employed in the year you turn 55. For example, if you are only turning 54 in the year you leave service and you wait until age 55 to make your 401k withdrawals, you still will not be able eligible for unlimited penalty-free withdrawals.

The bottom line is simple: if you are under the age of 59.5 and have left your job in the year you turn 55 or older, leave your 401k alone so that you can access the funds penalty free.

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